Solutions Manual, Vol.1, Chapter 8 8–1
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Question 8–1
Question 8–2
Question 8–3
Perpetual System Periodic System
(1) Purchase of merchandise debit inventory debit purchases
(2) Sale of merchandise debit cost of goods sold;
credit inventory no entry
(3) Return of merchandise credit inventory credit purchase returns
Chapter 8 Inventories: Measurement
QUESTIONS FOR REVIEW OF KEY TOPICS
Inventory for a manufacturing company consists of (1) raw materials, (2) work in
process, and (3) finished goods. Raw materials represent the cost, primarily purchase
price plus freight charges, of goods purchased from suppliers that will become part of
the finished product. Work-in-process inventory represents the products that are not
yet complete in the manufacturing process. The cost of work in process includes the
cost of raw materials used in production, the cost of labor that can be directly traced
to the goods in process, and an allocated portion of other manufacturing costs, called
manufacturing overhead. When the manufacturing process is completed, these costs
that have been accumulated in work in process are transferred to finished goods.
Beginning inventory plus net purchases for the period equals cost of goods
available for sale. The main difference between a perpetual and a periodic system is
that the periodic system allocates cost of goods available for sale to ending inventory
and cost of goods sold only at the end of the period. The perpetual system
accomplishes this allocation by decreasing inventory and increasing cost of goods
sold each time goods are sold.
(4) Payment of freight debit inventory debit freight-in
8–2 Intermediate Accounting, 9e
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McGraw-Hill Education.
Answers to Questions (continued)
Question 8–4
Question 8–5
Question 8–6
Question 8–7
Inventory shipped f.o.b. shipping point is included in the inventory of the
purchaser when the merchandise reaches the common carrier. Laetner Corporation
records the purchase in 2018 and includes the shipment in its ending inventory.
Bockner Company records the sale in 2018. Inventory shipped f.o.b. destination is
included in the inventory of the seller until it reaches the purchaser’s location.
Bockner would include the merchandise in its 2018 ending inventory and the
sale/purchase would be recorded in 2019.
A consignment is an arrangement under which goods are physically transferred
to another company (the consignee), but the transferor (consignor) retains legal title.
If the consignee can’t find a buyer, the goods are returned to the consignor. Goods
held on consignment are included in the inventory of the consignor until sold by the
consignee.
By the gross method, purchase discounts not taken are viewed as part of
inventory cost. By the net method, purchase discounts not taken are considered
interest expense because they are viewed as compensation to the seller for providing
financing to the buyer.
1. Beginning inventory — increase
2. Purchases — increase
3. Ending inventory — decrease
4. Purchase returns — decrease
5. Freight-in — increase
Solutions Manual, Vol.1, Chapter 8 8–3
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McGraw-Hill Education.
Answers to Questions (continued)
Question 8–8
Question 8–9
Question 8–10
Four methods of assigning cost to ending inventory and cost of goods sold are
(1) specific identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO),
and (4) average cost. The specific identification method requires each unit sold
during the period or each unit on hand at the end of the period to be traced through
the system and matched with its actual cost. First-in, first-out (FIFO) assumes that
units sold are the first units purchased. The last-in, first-out (LIFO) method assumes
that the units sold are the most recent units purchased. The average cost method
assumes that cost of goods sold and ending inventory consist of a mixture of all the
goods available for sale. The average unit cost applied to goods sold or ending
inventory is an average unit cost weighted by the number of units acquired at the
various unit prices.
When costs are declining, LIFO will result in a lower cost of goods sold and
higher income than FIFO. This is because LIFO will include in cost of goods sold
the most recently purchased lower-cost merchandise. LIFO also will provide a higher
ending inventory in the balance sheet.
Proponents of LIFO argue that it provides a better match of revenues and
expenses because cost of goods sold includes the costs of the most recent purchases.
These are matched with sales that reflect a current selling price. On the other hand,
inventory costs in the balance sheet generally are out of date because they are derived
from old purchase transactions. It is conceivable that a company’s LIFO inventory
balance could be based on unit costs actually incurred several years earlier. When
inventory quantity declines during a period, then these out-of-date inventory layers
will be liquidated and cost of goods sold will match noncurrent costs with current
selling prices.
8–4 Intermediate Accounting, 9e
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McGraw-Hill Education.
Answers to Questions (continued)
Question 8–11
Question 8–12
Question 8–13
Question 8–14
Many companies choose the LIFO inventory method to reduce income taxes in
periods when prices are rising. In periods of rising prices, LIFO results in a higher
cost of goods sold and therefore a lower net income than the other methods. The
companies’ income tax returns will report lower taxable incomes using LIFO and
lower taxes will be paid currently. If a company uses LIFO to measure its taxable
income, IRS regulations require that LIFO also be used to measure income reported
to investors and creditors.
The gross profit, inventory turnover, and average days in inventory ratios are
designed to monitor inventories. The gross profit ratio is calculated by dividing gross
profit (net sales minus cost of goods sold) by net sales. Inventory turnover is
calculated by dividing cost of goods sold by average inventory, and we compute
average days in inventory by dividing the number of days in the period by the
inventory turnover ratio.
A LIFO inventory pool groups inventory units into pools based on physical
similarities of the individual units. The average cost for all of a pool’s beginning
inventory and for all of a pool’s purchases during the period is used instead of
individual unit costs. If the quantity of ending inventory for the pool increases, then
ending inventory will consist of the beginning inventory plus a layer added during the
period at the average acquisition cost for the pool.
The dollar-value LIFO method has important advantages. First, it simplifies the
recordkeeping procedures compared to unit LIFO because no information is needed
about unit flows. Second, it minimizes the probability of the liquidation of LIFO
inventory layers, even more so than the use of pools alone, through the aggregation of
many types of inventory into larger pools. In addition, firms that do not replace units
sold with new units of the same kind can use the method.
Solutions Manual, Vol.1, Chapter 8 8–5
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McGraw-Hill Education.
Answers to Questions (concluded)
Question 8–15
After determining ending inventory at year-end cost, the following steps remain:
1. Convert ending inventory valued at year-end cost to base year cost.
2. Identify the layers in ending inventory with the years they were created.
3. Convert each layer’s base year cost measurement to layer year cost
measurement using the layer year’s cost index and then sum the layers.
Question 8–16
The primary difference between U.S. GAAP and IFRS in the methods
allowed to value inventory is that IFRS does not allow the use of the LIFO
method.
8–6 Intermediate Accounting, 9e
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McGraw-Hill Education.
Brief Exercise 8–1
Beginning inventory $186,000
Plus: Purchases 945,000
Less: Cost of goods sold (982,000)
Ending inventory $149,000
Brief Exercise 8–2
To record the purchase of inventory on account.
Inventory ......................................................................... 845,000
Accounts payable ........................................................ 845,000
To record sales on account and cost of goods sold.
Accounts receivable ........................................................ 1,420,000
Sales revenue .............................................................. 1,420,000
Cost of goods sold........................................................... 902,000
Inventory ..................................................................... 902,000
BRIEF EXERCISES
Solutions Manual, Vol.1, Chapter 8 8–7
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McGraw-Hill Education.
Brief Exercise 8–3
Both shipments should be included in inventory. The goods shipped to a
customer f.o.b. destination did not arrive at the customer’s location until after the
fiscal year-end. They belong to Kelly until they arrive at the customer’s location.
Title to the goods shipped from a supplier to Kelly on December 30, f.o.b. shipping
point, changed hands on December 30.
Brief Exercise 8–4
Purchase price = 10 units x $25,000 = $250,000
December 28, 2018
Inventory ......................................................................... 250,000
Accounts payable ....................................................... 250,000
January 6, 2019
Accounts payable ........................................................... 250,000
Cash (99% x $250,000) .................................................. 247,500
Inventory (1% x $250,000) ............................................ 2,500
8–8 Intermediate Accounting, 9e
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McGraw-Hill Education.
Brief Exercise 8–5
December 28, 2018
Inventory (99% x $250,000) ............................................... 247,500
Accounts payable ....................................................... 247,500
January 6, 2019
Accounts payable ............................................................ 247,500
Cash ............................................................................. 247,500
Solutions Manual, Vol.1, Chapter 8 8–9
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McGraw-Hill Education.
Brief Exercise 8–6 Cost of goods available for sale:
Beginning inventory (200 x $25) $5,000
Purchases:
100 x $28 $2,800
200 x $30 6,000 8,800
Cost of goods available (500 units) $13,800
First-in, first-out (FIFO)
Cost of goods available for sale (500 units) $13,800
Less: Ending inventory (determined below) (8,100)
Cost of goods sold $5,700
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
January 8 75 $28 $2,100
January 19 200 30 6,000
Total $8,100
Average cost
Cost of goods available for sale (500 units) $13,800
Less: Ending inventory (determined below) (7,590)
Cost of goods sold $6,210 *
Cost of ending inventory:
$13,800
Weighted-average unit cost = = $27.60
500 units
275 units x $27.60 = $7,590
* Alternatively, could be determined by multiplying the units sold by the average
cost: 225 units x $27.60 = $6,210
8–10 Intermediate Accounting, 9e
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McGraw-Hill Education.
Brief Exercise 8–7
First-in, first-out (FIFO)
Cost of goods sold:
Date of Cost of
Sale Units Sold Units Sold Total Cost
January 10 125 (from Beg. Inv.) $25 $3,125
January 25 75 (from Beg. Inv.) 25 1,875
25 (from 1/8 purchase) 28 700
Total 225 $5,700
Ending inventory:
Date of
Purchase Units Unit Cost Total Cost
January 8 75 $28 $2,100
January 19 200 30 6,000
Total $8,100
Solutions Manual, Vol.1, Chapter 8 8–11
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McGraw-Hill Education.
Brief Exercise 8–7 (concluded)
Average cost Date Purchased Sold Balance
Beginning
inventory
200 @ $25 = $5,000 200 @ $25 $5,000
January 8
Available
100 @ $28 = $2,800
$7,800
= $26/unit
300 units
January 10 125 @ $26 = $3,250 175 @ $26 $4,550
January 19
Available
200 @ $30 = $6,000
$10,550
= $28.133/unit
375 units
January 25 100 @ $28.133 = $2,813
275 @ $28.133 $7,737
Ending
inventory
Total cost of goods sold = $6,063
8–12 Intermediate Accounting, 9e
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Brief Exercise 8–8
Cost of goods available for sale:
Beginning inventory (20,000 x $25) $ 500,000
Purchases:
80,000 x $30 2,400,000
Cost of goods available (100,000 units) 2,900,000
Less: Ending inventory (15,000 units) 375,000*
Cost of goods sold $2,525,000
*15,000 units x $25 each = $375,000
Brief Exercise 8–9 64,000 units were sold.
Cost of goods sold without year-end purchase:
Units purchased during the year: 60,000 x $18 $1,080,000
Plus units from beginning inventory: 4,000 x $15 60,000
Cost of goods sold 1,140,000
Cost of goods sold with year-end purchase:
64,000 units x $18 1,152,000
Difference $ 12,000
Cost of goods sold would be $12,000 higher and income before income taxes
$12,000 lower if the year-end purchase is made.
If FIFO were used instead of LIFO, the year-end purchase would have no effect
on income before income taxes. FIFO cost of goods sold with or without the
purchase would consist of the 10,000 units from beginning inventory and 54,000
units purchased during the year at $18:
10,000 units x $15 $ 150,000
Plus: 54,000 units x $18 972,000
Cost of goods sold $1,122,000
Solutions Manual, Vol.1, Chapter 8 8–13
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McGraw-Hill Education.
Brief Exercise 8–10
Units liquidated 5,000
Difference in cost ($30 – 25) x $5
Before-tax LIFO liquidation profit $25,000
Tax effect ($25,000 x 40%) (10,000)
LIFO liquidation profit $15,000
Brief Exercise 8–11
Cost of goods sold for the year ended August 31, 2015, would have been $200
million lower had Walgreens used FIFO for its LIFO inventory. While beginning
inventory would have been $2,300 million higher, ending inventory also would have
been higher by $2,500 million. An increase in beginning inventory causes an
increase in cost of goods sold, but an increase in ending inventory causes a decrease
in cost of goods sold. Purchases for the year are the same regardless of the inventory
valuation method used.
Cost of goods sold as reported (LIFO) $76,520 million
Decrease if FIFO (200) million
Cost of goods sold, FIFO instead of LIFO $76,320 million
8–14 Intermediate Accounting, 9e
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Brief Exercise 8–13
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/2018 $1,400,000
= $1,400,000 $1,400,000 (base) $1,400,000 x 1.00 =$1,400,000 $1,400,000
1.00
12/31/2018 $1,664,000
= $1,600,000 $1,400,000 (base) $1,400,000 x 1.00 = $1,400,000
1.04 200,000 (2018) 200,000 x 1.04 = 208,000 $1,608,000
Solutions Manual, Vol.1, Chapter 8 8–15
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McGraw-Hill Education.
Exercise 8–1 1. To record the purchase of inventory on account and the payment of freight
charges.
Inventory ......................................................................... 5,000
Accounts payable ....................................................... 5,000
Inventory ......................................................................... 300
Cash ............................................................................ 300
2. To record purchase returns.
Accounts payable ........................................................... 600
Inventory ..................................................................... 600
3. To record cash sales and cost of goods sold.
Cash ................................................................................ 5,200
Sales revenue .............................................................. 5,200
Cost of goods sold .......................................................... 2,800
Inventory ..................................................................... 2,800
EXERCISES
8–16 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–2 1. To record the purchase of inventory on account and the payment of freight
charges.
Purchases ......................................................................... 5,000
Accounts payable ........................................................ 5,000
Freight-in ......................................................................... 300
Cash ............................................................................. 300
2. To record purchase returns.
Accounts payable ............................................................ 600
Purchase returns .......................................................... 600
3. To record cash sales.
Cash ................................................................................. 5,200
Sales revenue .............................................................. 5,200
NO ENTRY IS MADE FOR THE COST OF GOODS SOLD.
Solutions Manual, Vol.1, Chapter 8 8–17
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McGraw-Hill Education.
Exercise 8–3
Requirement 1
Beginning inventory $ 32,000
Plus net purchases:
Purchases $240,000
Less: Purchase discounts (6,000)
Less: Purchases returns (10,000)
Plus: Freight-in 17,000 241,000
Cost of goods available for sale 273,000
Less: Ending inventory (40,000)
Cost of goods sold $233,000
Requirement 2
Cost of goods sold (above) .............................................. 233,000
Inventory (ending) ........................................................... 40,000
Purchase discounts ......................................................... 6,000
Purchase returns ............................................................. 10,000
Inventory (beginning) ................................................... 32,000
Purchases .................................................................... 240,000
Freight-in .................................................................... 17,000
8–18 Intermediate Accounting, 9e
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Exercise 8–5 2018 2019 2020
Beginning inventory 275 (1) 249 (3) 225
Cost of goods sold 627 621 584 (6)
Ending inventory 249 (2) 225 216
Cost of goods available for sale 876 846 (4) 800
Purchases (gross) 630 610 (5) 585
Purchase discounts 18 15 12 (7)
Purchase returns 24 30 14
Freight-in 13 32 16
Net purchases = Purchases (gross) – Purchase returns – Purchase discounts + Freight-in
Beginning inventory + Net purchases = Cost of goods available for sale
Cost of goods available for sale – Ending inventory = Cost of goods sold
2018:
(1) Cost of goods available for sale – Net purchases = Beginning inventory
876 – (630 – 18 – 24 + 13) = 275 = Beginning inventory
(2) Cost of goods available for sale – Cost of goods sold = Ending inventory
876 – 627 = 249 = Ending inventory
2019:
(3) 2019 beginning inventory = 2018 ending inventory = 249
(4) Cost of goods sold + Ending inventory = Cost of goods available for sale
621 + 225 = 846 = Cost of goods available for sale
(5) Cost of goods available for sale – Beginning inventory = Net purchases
846 – 249 = 597 = Net purchases
Net purchases + Purchases discounts + Purchase returns – Freight-in = Purchases(gross)
597 + 15 + 30 – 32 = 610 = Purchases (gross)
2020:
(6) Cost of goods available for sale – Ending inventory = Cost of goods sold
800 – 216 = 584 = Cost of goods sold
Solutions Manual, Vol.1, Chapter 8 8–19
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McGraw-Hill Education.
Exercise 8–5 (concluded)
(7) Cost of goods available for sale – Beginning inventory = Net purchases
800 – 225 = 575 = Net purchases
Purchases (gross) – Purchase returns + Freight-in – Net purchases = Purchase discounts
585 – 14 + 16 – 575 = 12 = Purchase discounts
8–20 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–6 Inventory balance before additional transactions $165,000
Add:
2. Goods shipped to Kwok f.o.b. shipping point on Dec. 28 17,000
3. Goods shipped to customer f.o.b. destination on December 27 22,000
Correct inventory balance $204,000
Exercise 8–7 Inventory balance before additional transactions $210,000
Add:
4. Merchandise on consignment with Joclyn Corp. 15,000
Deduct:
1. Merchandise shipped to Raymond f.o.b. destination on December 26 (30,000)
2. Merchandise held on consignment from the Harrison Company (14,000)
Correct inventory balance $181,000
Exercise 8–8 1. Excluded
2. Included
3. Included
4. Excluded
5. Included
6. Excluded
7. Included
Solutions Manual, Vol.1, Chapter 8 8–21
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McGraw-Hill Education.
Exercise 8–11
Requirement 1
Purchases: $500 x 70% = $350 per unit.
100 units x $350 = $35,000
November 17, 2018
Purchases ........................................................................ 35,000
Accounts payable ....................................................... 35,000
November 26, 2018
Accounts payable .......................................................... 35,000
Purchase discounts (2% x $35,000) ............................... 700
Cash (98% x $35,000) .................................................... 34,300
Requirement 2
December 15, 2018
Accounts payable ........................................................... 35,000
Cash ............................................................................ 35,000
8–22 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–11 (concluded)
Requirement 3
Requirement 1:
November 17, 2018
Purchases (98% x $35,000) ................................................ 34,300
Accounts payable ........................................................ 34,300
November 26, 2018
Accounts payable ............................................................ 34,300
Cash ............................................................................. 34,300
Requirement 2:
December 15, 2018
Accounts payable ............................................................ 34,300
Interest expense (2% x $35,000) ........................................ 700
Cash ............................................................................. 35,000
Solutions Manual, Vol.1, Chapter 8 8–23
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McGraw-Hill Education.
Exercise 8–13 Cost of goods available for sale:
Beginning inventory (2,000 x $6.10) $12,200
Purchases:
10,000 x $5.50 $55,000
6,000 x $5.00 30,000 85,000
Cost of goods available (18,000 units) $97,200
First-in, first-out (FIFO)
Cost of goods available for sale (18,000 units) $97,200
Less: Ending inventory (determined below) (15,000)
Cost of goods sold $82,200
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
August 18 3,000 $5.00 $15,000
Last-in, first-out (LIFO)
Cost of goods available for sale (18,000 units) $97,200
Less: Ending inventory (determined below) (17,700)
Cost of goods sold $79,500
Cost of ending inventory:
Date of
purchase Units Unit cost Total cost
Beg. Inv. 2,000 $6.10 $12,200
August 8 1,000 5.50 5,500
Total $17,700
8–24 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–13 (concluded)
Average cost
Cost of goods available for sale (18,000 units) $97,200
Less: Ending inventory (determined below) (16,200)
Cost of goods sold $81,000 *
Cost of ending inventory:
$97,200
Weighted-average unit cost = = $5.40
18,000 units
3,000 units x $5.40 = $16,200
* Alternatively, could be determined by multiplying the units sold by the average
cost: 15,000 units x $5.40 = $81,000
Solutions Manual, Vol.1, Chapter 8 8–25
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McGraw-Hill Education.
Exercise 8–14 First-in, first-out (FIFO)
Cost of goods sold:
Date of Cost of
Sale Units Sold Units Sold Total Cost
Aug. 14 2,000 (from Beg. Inv.) $6.10 $12,200
6,000 (from 8/8 purchase) 5.50 33,000
Aug. 25 4,000 (from 8/8 purchase) 5.50 22,000
3,000 (from 8/18 purchase) 5.00 15,000
Total 15,000 $82,200
Ending inventory = 3,000 units x $5.00 = $15,000
Last-in, first-out (LIFO) Date Purchased Sold Balance
Beginning
inventory
2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200
August 8 10,000 @ $5.50 = $55,000 2,000 @ $6.10
10,000 @ $5.50 $67,200
August 14 8,000 @ $ 5.50 = $44,000 2,000 @ $6.10
2,000 @ $5.50 $23,200
August 18 6,000 @ $5.00 = $30,000 2,000 @ $6.10
2,000 @ $5.50 $53,200
6,000 @ $5.00
August 25 6,000 @ $5.00 = $30,000
1,000 @ $5.50 = $ 5,500
2,000 @ $6.10
1,000 @ $5.50 $17,700
Ending
inventory
Total cost of goods sold = $79,500
8–26 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–14 (concluded)
(Note: the perpetual inventory LIFO results in this exercise are the same as
periodic LIFO results, due to the timing of sales and purchases. The same LIFO
layers are on hand at the end of the period under each method. This is unusual. LIFO
perpetual and LIFO periodic normally produce different results for ending inventory
and cost of goods sold.)
Average cost Date Purchased Sold Balance
Beginning
inventory
2,000 @ $6.10 = $12,200 2,000 @ $6.10 $12,200
August 8
Available
10,000 @ $5.50 = $55,000
$67,200
= $5.60/unit
12,000 units
August 14 8,000 @ $5.60 = $44,800 4,000 @ $5.60 $22,400
August 18
Available
6,000 @ $5.00 = $30,000
$52,400
= $5.24/unit
10,000 units
August 25 7,000 @ $5.24 = $36,680
3,000 @ $5.24 $15,720
Ending
inventory
Total cost of goods sold = $81,480
Solutions Manual, Vol.1, Chapter 8 8–27
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McGraw-Hill Education.
Exercise 8–16
Requirement 1
Cost of goods available for sale:
Beginning inventory (5,000 x $10.00) $ 50,000
Purchases:
3,000 x $10.40 $31,200
8,000 x $10.75 86,000 117,200
Cost of goods available (16,000 units) $167,200
Cost of goods available for sale (16,000 units) $167,200
Less: Ending inventory (below) (73,150)
Cost of goods sold $ 94,050*
Cost of ending inventory:
$167,200
Weighted-average unit cost = = $10.45
16,000 units
7,000 units x $10.45 = $73,150
* Alternatively, could be determined by multiplying the units sold by the average
cost: 9,000 units x $10.45 = $94,050
8–28 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–16 (concluded)
Requirement 2
Date Purchased Sold Balance
Beginning
inventory
5,000 @ $10.00 = $50,000 5,000 @ $10.00 $50,000
September 7
Available
3,000 @ $10.40 = $31,200
$81,200
= $10.15/unit
8,000 units
September 10 4,000 @ $10.15 = $40,600 4,000 @ $10.15 $40,600
September 25
Available
8,000 @ $10.75 = $86,000
$126,600
= $10.55/unit
12,000 units
September 29 5,000 @ $10.55 = $52,750
7,000 @ $10.55 $73,850
Ending
inventory
Total cost of goods sold = $93,350
Solutions Manual, Vol.1, Chapter 8 8–29
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McGraw-Hill Education.
Exercise 8–18
Requirement 1
January 31, 2016 ($ in thousands)
LIFO reserve ($18,093 − $13,655) ..................................... 4,438
Cost of goods sold ...................................................... 4,438
Requirement 2
$209,826 + $4,438 = $214,264 thousand cost of goods sold under FIFO.
Cost of goods sold is provided as $209,826 (thousand) on a LIFO basis. To convert
LIFO to FIFO, the adjustment in Requirement 1 converting FIFO to LIFO is reversed
and cost of goods sold is thereby increased by $4,438.
8–30 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–19
Requirement 1
Cost of goods sold:
50,000 units x $8.50 = $425,000
4,000 units x $7.00 = 28,000
$453,000
Requirement 2
When inventory quantity declines during a reporting period, liquidation of LIFO
inventory layers carried at different costs prevailing in prior year’s results in
noncurrent costs being matched with current selling prices. If the resulting effect on
income is material, it must be disclosed. In this case, the effect of the LIFO layer
liquidation is to increase income (ignoring taxes) by $6,000 [4,000 units liquidated x
$1.50 ($8.50 current year cost per unit – $7 LIFO layer cost per unit)].
Solutions Manual, Vol.1, Chapter 8 8–31
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McGraw-Hill Education.
Exercise 8–24 Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
12/31/2018 $200,000
= $200,000 $200,000 (base) $200,000 x 1.00 = $200,000 $200,000
1.00
12/31/2019 $231,000
= $220,000 Index = 1.05
Index
$200,000 (base) $200,000 x 1.00 = $200,000
20,000 (2019) 20,000 x 1.05 = 21,000 221,000
12/31/2020 $299,000
= $260,000 Index = 1.15
Index
$200,000 (base) $200,000 x 1.00 = $200,000
20,000 (2019) 20,000 x 1.05 = 21,000
40,000 (2020) 40,000 x 1.15 = 46,000 267,000
12/31/2021 $300,000
= $250,000 Index = 1.20
Index
$200,000 (base) $200,000 x 1.00 = $200,000
20,000 (2019) 20,000 x 1.05 = 21,000
30,000 (2020) 30,000 x 1.15 = 34,500 255,500
8–32 Intermediate Accounting, 9e
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McGraw-Hill Education.
Exercise 8–25
Set the base year, 1/1/2018, equal to 1.00.
Cost index in layer year: 264 ÷ 240 = 1.10
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/2018 $720,000
_______
= $720,000 $720,000 (base) $720,000 x 1.00 = $720,000 $720,000
1.00
12/31/2018 $880,000
_______
= $800,000 $720,000 (base) $720,000 x 1.00 = $720,000
1.10 80,000 (2018) 80,000 x 1.10 = 88,000 808,000
Solutions Manual, Vol.1, Chapter 8 8–33
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McGraw-Hill Education.
Exercise 8–26
List A List B
i 1. Perpetual inventory a. Legal title passes when goods are
system delivered to common carrier.
l 2. Periodic inventory system b. Goods are transferred to another company
but title remains with transferor.
a 3. F.o.b. shipping point c. Purchase discounts not taken are included
in inventory cost.
c 4. Gross method d. If LIFO is used for taxes, it must be used
for financial reporting.
g 5. Net method e. Assumes items sold are those acquired
first.
h 6. Cost index f. Assumes items sold are those acquired
last.
k 7. F.o.b. destination g. Purchase discounts not taken are
considered interest expense.
e 8. FIFO h. Used to convert ending inventory at year-
end cost to base year cost.
f 9. LIFO i. Continuously records changes in
inventory.
b 10. Consignment j. Items sold come from a mixture of goods
acquired during the period.
j 11. Average cost k. Legal title passes when goods arrive at
location.
d 12. IRS conformity rule l. Adjusts inventory at the end of the period.
8–34 Intermediate Accounting, 9e
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McGraw-Hill Education.
PROBLEMS
Solutions Manual, Vol.1, Chapter 8 8–35
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 8–2 1. The transaction is not correctly accounted for. Inventory held on consignment by
another company should be included in the inventory of the consignor. Rasul
should include this merchandise in its 2018 ending inventory.
2. The transaction is not correctly accounted for. Legal title to merchandise shipped
f.o.b. shipping point changes hands when the goods are shipped. Rasul should
record the purchase and corresponding account payable in 2018 and include the
merchandise in its 2018 ending inventory.
3. The transaction is not correctly accounted for. Since the merchandise was shipped
f.o.b. destination and did not arrive at the customer's location until 2019, it should
be included in Rasul’s 2018 ending inventory. The sale should be recorded in
2019.
4. The transaction is correctly accounted for. Merchandise held on consignment
from another company belongs to the consignor and should be excluded from the
inventory of the consignee.
5. The transaction is correctly accounted for. Since the merchandise was shipped
f.o.b. destination and did not arrive at Rasul’s location until 2019, it should not be
included in Rasul’s 2018 ending inventory. The purchase is correctly recorded in
2019.
Problem 8–3 Accounts
Inventory Payable Sales
Initial amounts $1,250,000 $1,000,000 $9,000,000
Adjustments - increase (decrease):
1. (155,000) (155,000) NONE
2. (22,000) NONE NONE
3. NONE NONE 40,000
4. 210,000 NONE NONE
5. 25,000 25,000 NONE
6. 2,000 2,000 NONE
7. (5,300) (5,300) NONE
Total adjustments 54,700 (133,300) 40,000
Adjusted amounts $1,304,700 $ 866,700 $9,040,000
8–36 Intermediate Accounting, 9e
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McGraw-Hill Education.
Problem 8–8
Requirement 1
The note indicates that if the company had used FIFO, inventory would have
been higher by $2,498 million and $2,430 million at the end of 2015 and 2014,
respectively. The increase in the difference between LIFO and FIFO means there
was an increase in the LIFO reserve in 2015. The increase in the LIFO reserve
increased cost of goods sold by $68 million under LIFO. Therefore, we subtract
this amount from LIFO cost of goods sold to determine FIFO cost of goods sold
of $33,674 million ($33,742 million − $68 million).
Requirement 2
Because cost of goods sold would have been lower by $68 million if FIFO had
been used, income before taxes would have been higher by $68 million.
Requirement 3
The information might be useful to a financial analyst interested in comparing
Caterpillar’s performance with another company using the FIFO inventory
method exclusively.
Solutions Manual, Vol.1, Chapter 8 8–37
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 8–11
Requirement 1
Sales (27,000 units x $2,000) $54,000,000
Less: Cost of goods sold (27,000 units x $1,000) (27,000,000)
Gross profit $27,000,000
Gross profit ratio = $27,000,000 $54,000,000 = 50%
Requirement 2
Sales (27,000 units x $2,000) $54,000,000
Less: Cost of goods sold* (25,000,000)
Gross profit $29,000,000
Gross profit ratio = $29,000,000 $54,000,000 = 53.7%
*Cost of goods sold:
15,000 units x $1,000 = $15,000,000
6,000 units x $ 900 = 5,400,000
4,000 units x $ 800 = 3,200,000
2,000 units x $ 700 = 1,400,000
27,000 units $25,000,000
8–38 Intermediate Accounting, 9e
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McGraw-Hill Education.
Problem 8–11 (concluded)
Requirement 3
The gross profit and gross profit ratio are higher applying the requirement 2
assumption of 15,000 units purchased because of the LIFO liquidation profit that
results. When inventory quantity declines during a reporting period, LIFO inventory
layers carried at costs prevailing in prior years are “liquidated” or assumed sold in the
cost of goods sold calculation. This results in noncurrent costs being matched with
current selling prices. If the company had purchased at least 27,000 units during
2019, there would be no LIFO liquidation.
The profit difference ($2,000,000 in this case), if material, must be disclosed in a
note. The difference can be arrived at by comparing the current replacement cost of
$1,000 with each inventory layer from prior years that was included in this year’s cost
of goods sold, as follows:
6,000 units x $100 ($1,000 – 900) $ 600,000
4,000 units x $200 ($1,000 – 800) 800,000
2,000 units x $300 ($1,000 – 700) 600,000
Total LIFO liquidation profit $2,000,000
Requirement 4
Sales (27,000 units x $2,000) $54,000,000
Cost of goods sold:
5,000 units x $700 $ 3,500,000
4,000 units x $800 3,200,000
6,000 units x $900 5,400,000
12,000 units x $1,000 12,000,000 24,100,000
27,000 units
Gross profit = $29,900,000
Gross profit ratio = $29,900,000 $54,000,000 = 55.4%
If only 15,000 units are purchased, cost of goods sold, gross profit, and the gross
profit ratio would be exactly the same as when 28,000 units are purchased.
Requirement 5
The number of units purchased has no effect on FIFO cost of goods sold. When
applying the first-in, first-out approach, beginning inventory costs are included in
cost of goods sold first, regardless of the quantities of inventory purchased in the new
reporting period.
Solutions Manual, Vol.1, Chapter 8 8–39
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 8–12
Requirement 1
Allowance for uncollectible accounts
Balance, beginning of year $7
Add: Bad debt expense for 2018 8
Less: End-of-year balance (10)
Accounts receivable written off $ 5
Requirement 2
Accounts receivable analysis:
Balance, beginning of year ($583 + 7) $ 590
Add: Credit sales 6,255
Less: write-offs (from Requirement 1) (5)
Less: Balance end of year ($703 + 10) (713)
Cash collections $6,127
Requirement 3
Cost of goods sold for 2018 would have been $130 million lower had Inverness
used the average cost method for its entire inventory. While beginning inventory
would have been $350 million higher, ending inventory also would have been higher
by $480 million. An increase in beginning inventory causes an increase in cost of
goods sold, but an increase in ending inventory causes a decrease in cost of goods
sold. Purchases for the year are the same regardless of the inventory valuation
method used. Therefore, cost of goods sold would have been $5,060 ($5,190 – 130).
Requirement 4
a. Receivables turnover ratio = $6,255 = 9.73 times
($703 + 583)/2
b. Inventory turnover ratio = $5,190 = 6.15 times
($880 + 808)/2
c. Gross profit ratio = ($6,255– 5,190) = 17%
$6,255
8–40 Intermediate Accounting, 9e
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McGraw-Hill Education.
Problem 8–12 (concluded)
Requirement 5
If inventory costs are increasing, when inventory quantity declines during a
period, liquidation of LIFO inventory layers carried at lower costs prevailing in prior
year’s results in noncurrent costs being matched with current selling prices. The
“income” generated by this liquidation is known as LIFO liquidation profit.
The liquidation caused 2018 cost of goods sold to be lower by $9.23 million [$6
million (1 – .35)]
Problem 8–16 Ending
Ending Inventory Inventory Layers Inventory Layers Inventory
Date at Base Year Cost at Base Year Cost Converted to Cost DVL Cost
1/1/2018 $84,000
= $84,000 $84,000 (base) $84,000 x 1.00 = $84,000 $84,000
1.00
12/31/2018 $100,800
= $96,000 $84,000 (base) $84,000 x 1.00 = $84,000
1.05 12,000 (2018) 12,000 x 1.05 = 12,600 96,600
12/31/2019 $136,800
= $120,000 $84,000 (base) $84,000 x 1.00 = 84,000
1.14 12,000 (2018) 12,000 x 1.05 = 12,600
24,000 (2019) 24,000 x 1.14 = 27,360 123,960
12/31/2020 $150,000
= $125,000 $84,000 (base) $84,000 x 1.00 = $84,000
1.20 (1) 12,000 (2018) 12,000 x 1.05 = 12,600
24,000 (2019) 24,000 x 1.14 = 27,360
5,000 (2020) 5,000 x 1.20 = 6,000 129,960
12/31/2021 $160,000(5)
= $128,000(4) $84,000 (base) $84,000 x 1.00 = 84,000
1.25 12,000 (2018) 12,000 x 1.05 = 12,600
24,000 (2019) 24,000 x 1.14 = 27,360
5,000 (2020) 5,000 x 1.20 = 6,000
3,000 (2021) 3,000(3) x 1.25 = 3,750(2) 133,710
(1) $150,000 $125,000 = 1.20 (2020 cost index)
(2) $133,710 – 129,960 = $3,750
(3) $3,750 1.25 = $3,000
(4) $125,000 + 3,000 = $128,000 (2021inventory at base-year cost)
(5) $128,000 x 1.25 = $160,000 (2021inventory at year-end costs)